Homeownership Programs = Total Failure

We’ve seen an unending string of programs to boost homeownership.

They’ve failed spectacularly if you judge their success by their stated idealistic goal of increasing homeownership in the United States. Clearly they’ve been a massive failure using their own homeownership goal.

However, they have been spectacularly successful if you take a more realistic, political view of their goals. The programs have pumped billions of dollars into housing organizations and despite their terrible track record on homeownership the money continues to flow because the real goal is to simply fund the housing organizations.

Best Explanation of Banking/Housing Crisis

Columbia economics professor Charles Calomiris’ book, “Fragile by Design,” does a great job of explaining the political bargain that created this fragile banking system that has led to tremendous home price instability that has decimated the net worth of low and moderate income homeowners.

The current system promoting U.S. homeownership has been responsible for wiping out the net worth of many low and moderate income families.

How would you have liked to have scrimped and saved for years on low wages to buy your family a home and then to have the home lose 80% of its value in the real estate bust?

The Money Quotes

“Now the real drama will be found on the gridiron Sunday, when the Seattle Seahawks battle the New England Patriots, and not in its housing market. If anything, things are “balanced,” says John Wake, a real estate agent for HomeSmart in Phoenix who also runs the Arizona Real Estate Notebook site.”

And,

“Then home prices rebounded in 2012 (median prices increased by 17 percent from the year before), and inventory shrunk from 60,000 homes listed for sale down to 17,000 homes.

Today, after years of manic activity, things are “boring.”

“Boring is good, very good,” says Wake. “The number of homes being sold is kind of low, but so is the number of homes hitting the market,” he adds.”

“In some situations there may only be one value needed, which is as of the current date or date of the filing of the divorce, and in other instances two values may be needed. Two values may be needed if the home was owned by one of the parties before the marriage occurred, and if there has been a significant change in the value of the property since the marriage.”

You also sometimes see that when you’ve inherited an income property in the past and now need to determine the basis for taxes.

In both cases you hire an appraiser to determine the value of the property at some point in the past.

If you think, “John’s crazy! I paid $200,000 for my house in 2000 and it’s worth $280,000 today. It’s appreciated a helluva lot!,” I’ve got bad news for you.

Total inflation from 2000 to today has been 40%.

$200,000 in 2000 is worth $280,000 in 2015, after inflation.

This fits nicely with super long terms studies from economists Case and Shiller themselves that found real U.S. home prices have generally only appreciated 0.4% or 0.7% a year depending on how they cut the data. Ten years ago their studies seemed completely silly, that times had changed, this time was different. Today, their studies don’t seem so out of touch.

It’s been a wild ride but real (inflation-adjusted) home prices in metro Phoenix are where they were back in 2001.

And if you go back 25 years to January 1989 (the oldest data Case-Shiller has for Phoenix), real Phoenix home prices have only increased a grand total of 10%, or 0.4% per year on average.

[To be fair, I should point out that 1989 was probably the top of the “Savings and Loan” real estate boom of the late 1980’s. That boom was mainly in commercial real estate but it did have an impact on residential real estate prices.]

The Story of Us

To me, that graph tells an absolutely amazing story of greed, fear and the utter failure of a market system.

What I remember the most is the tremendous pain it caused so many people who lost their homes and sometimes their life savings too.

Now, all that’s in the past and it will stay in the past for the next few years until people forget the pain and slowly, slowly remove the few safeguards put in place after the last bust and we begin another boom cycle.

Real Phoenix home prices have been flat for over 12 months and will probably remain flat or with slight real appreciation for the foreseeable future.

A boring real estate market is a good real estate market but there’s no money in boring. Eventually, the promoters saying, “This time is different” will take over the public imagination again and so it begins.

But right now – thank goodness – we’ve already paid the price for past excesses and we have a stable real estate market in Phoenix.

Banks Foreclosing Fast

“The banks aren’t dragging their feet to finish the foreclosure process, as 50% of those that end in foreclosure will be completed in less than 97 days after the notice is filed.”

Boy, that’s a change! During the peak of foreclosures, it took banks more than 6 months to complete a foreclosure on average.

2014 Summary

“The price increases we’ve seen in the last 18 months are characteristic of a normal sustainable market, interest rates are at historical lows (3.86% Dec. 2014), the millennials are one year older, births are increasing, gas prices are low ($2.04 national average), boomerang buyers have had one more year to repair their credit and conventional buyers are making up a larger percentage of home purchases.”

2015 Outlook

“People are feeling better about themselves. I feel it’s a safe bet to say 2015 sales volume will exceed 2014. I don’t think it will be the breakout year we’ve been awaiting, but in terms of sales volume, it will definitely be better.”

The general consensus is the Phoenix real estate market is in balance with little or no price movement – up or down – expected for homes.

But the number of homes selling is low by historic standards. Usually that weak demand would mean downward pressure on prices but not this time.

Right now in metro Phoenix real estate the weak demand is matched by weak supply.

Why aren’t more homes selling in Phoenix?

Underwater homes. They used to be a top real estate story but you haven’t heard much about homeowners being underwater in the last few years. Sure, there’s a ton fewer homeowners underwater – the problem is smaller now – but there still remains a ton of homes underwater in Arizona.

The big Phoenix real estate story in 2012 and 2013 was rapidly increasing home prices and the underwater homeowner story faded.

It’s certainly true that a zillion Phoenix homeowners who were underwater in 2009-2011 (they owed more on their homes than their homes were worth) got above water and sold.

The Backlog

In fact, a backlog of people who wanted to sell a few years ago but couldn’t without losing money or without doing a short sale were able to sell their homes without losing money after the 2012 and 2013 price increases.

So we quite naturally saw a burst of people listing their homes for sale in 2012, 2013 and 2014 taking advantage of the higher home prices. But that burst didn’t last forever.

If looks like we worked our way through that backlog of formerly-underwater home sellers last summer. Since then, the number of homes hitting the market has been unusually low.

19% of Arizona mortgages are still underwater

Corelogic estimates that 19% of Arizona homeowners with mortgages are still underwater and most homes have a mortgage, of course. Their estimate is a very gross estimate but I’ll assume 19% is in the right ballpark. Arizona is #3 in underwater homes, behind only Nevada and Florida, according to Corelogic.

Now, of course those people who are still underwater could theoretically sell their underwater homes but most people will do just about anything to avoid selling their home when the sale price isn’t enough to pay off their mortgage.

Those potential home sellers would have to pay money to sell their homes! Yeah, people don’t like that. It’s no big revelation that people hate to lose money and they’ll do a lot more to avoid losing a dollar than they’ll do to gain a dollar.

They may need a bigger home, a smaller home or a different home but people really, really, really, don’t like losing money and having to PAY money when they sell their homes. If they sell when they’re underwater, they lock in a loss.

They’re Not Going To Do a Short Sale

Of course, they could sell their underwater home via short sale but if they’re underwater now, they’ve probably been underwater since 2009 or before.

They’ve obviously been able to make their mortgage payments all these years despite their house being underwater and they’ve obviously chosen not do a short sale throughout the last 6 years so it’s very unlikely that now they’ll change their mind and decide to do a short sale (unless, of course, something has changed and they’ve recently lost their job or something).

Finally – The Point

And thus I finally circle back to the point of this post and explain why the supply of homes hitting the market in metro Phoenix is so low;

Having 19% of homes underwater is functionally equivalent to reducing the potential supply of homes for sale by 19%.

What It Means for Home Buyers and Sellers

Okay, this is a little anti-climatic but the low supply of homes for sale doesn’t mean much for Phoenix home buyers and Phoenix home sellers as long as demand also remains low.

For Phoenix home buyers, it means your selection of homes to chose from might be a bit lower than normal but you still have a huge selection of homes,

For Phoenix home sellers, it means you have a bit less competition from other home sellers but since it won’t translate into higher home prices (demand is also down), it’s not really that big of a deal for you.

What It Means for the Real Estate Industry

The people this low-supply/low-demand Phoenix real estate market impacts most are the people in the Phoenix real estate industry – the title companies, the lenders and loan officers, the home inspectors, the appraisers and the real estate agents – because the number of homes sold is a bit low.

It’s not a bad market for the Phoenix real estate industry, it’s just a slow market, a blah market, a boring market. And that’s not too bad.

Don’t get confused when you hear news stories about the U.S. real estate market or home prices in another city. All that matters is what’s happening here at home in the metro Phoenix real estate market.

Play with the interactive graph a bit and you’ll quickly see that what happens to home prices in other cities is meaningless for us.

It’s Only Natural

When you hear bad news about home prices in Detroit or Cleveland you immediately think, “Well, that certainly doesn’t apply to my home in Phoenix!” and you’re right.

But when you hear the “good” news about home prices in San Francisco or Los Angeles you naturally think, “Well, that probably means my home’s value is increasing here in Phoenix too” and you would be wrong.

I know. You’re an optimist. But being optimistic and thinking your home’s value is increasing when it’s not can lead to VERY expensive mistakes when you’re selling your house.

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John Wake is a Scottsdale real estate agent and former economist who writes about and forecasts the metro Phoenix real estate market. His influential blog, Arizona Real Estate Notebook, has totaled nearly 1.5 million visitors.

John was THE first to forecast 2014’s “Return to Normal Market”

John accurately forecast the critical change in the 2014 Phoenix real estate market in 2013 - long before anyone else - saying the market could return to "normal" because of big increases in the inventory of homes listed for sale.

Several months later "return to normal" did indeed become the general catch phrase for the 2014 Phoenix real estate market.